With New International Accounting Standard... KCMI Says "If Overseas Clothes Don't Fit, They Should Be Altered"

"If clothes purchased from overseas do not fit, it is sometimes necessary to make appropriate alterations."

With the introduction of the new International Financial Reporting Standard (IFRS 18) approaching, there are calls for "appropriate alterations" tailored to the Korean context. This is because, starting in 2027, foreign exchange gains unrelated to core business operations and one-off gains from asset sales will also be included in the concept of "operating profit," which could lead to market confusion such as controversies over "fake earnings surprises."

At the "KCMI Issue Briefing" held in Yeouido on the morning of April 29, Lee Sangho, a research fellow at the Korea Capital Market Institute, stated, "If IFRS 18 is introduced in Korea without reasonable adjustments, foreign exchange gains and one-off asset sale gains unrelated to core business operations will be included in operating profit, making it difficult for investors to accurately assess a company's actual operating performance."

IFRS 18, which will be applied from January 1, 2027, classifies a company's performance into three categories: operating, investing, and financing. It defines operating profit as the residual profit after excluding the investing and financing categories. Compared to the current K-IFRS operating profit, which is calculated by subtracting cost of goods sold and selling, general, and administrative expenses from revenue, both the amount and nature of operating profit will change, making confusion inevitable for both companies and investors.

In particular, Lee cited the case of Company H, where gains from the sale of employee housing land were included in operating profit, leading to controversy in the market over a fake earnings surprise. He pointed out that similar controversies could be repeated at many companies. Although the company in question had a real estate development division and followed proper accounting procedures, it still became embroiled in such controversy.

He also warned, "Since various impairment losses will also be reflected as 'operating' losses, companies may be incentivized to understate or delay the recognition of expected future losses, rather than reflecting them in a timely manner." He added, "There is also a possibility that aggressive financial reporting practices could spread, especially among KOSDAQ and small- to mid-cap stocks, where monitoring is limited and the proportion of retail investors is high." The limited information environment of the Korean capital market was cited as an additional factor exacerbating these concerns.

Accordingly, there are calls for reasonable adjustments that take into account the overall environment of the Korean capital market before the IFRS 18 era begins. When IFRS was first fully adopted, there were also preliminary improvements made, such as supplementing the definition of operating profit, to better suit the Korean capital market.

Lee emphasized that information on recurring operating performance should be provided according to clear standards and methods. He also pointed out the need to structure and segment the stock exchange's earnings disclosure format so that major non-recurring profit and loss items can be communicated to investors in a timely manner, even before the regular report disclosures. Furthermore, he added that policy measures should be put in place to encourage the disclosure of management-defined performance measures (MPMs).

Lee remarked, "While it may sometimes be necessary in the long run to adjust oneself to clothes purchased overseas that do not fit, if making appropriate alterations allows the clothes to fit better, which choice would be more reasonable?" He reiterated the need for improvements, saying, "The purpose of IFRS 18 is to enhance the usefulness of information for investors. Without undermining this purpose, it is the responsible approach for a leading IFRS adopter to seek supplementary measures that consider the characteristics of our market and the practical needs of information users through 'appropriate alterations.'"

This content was produced with the assistance of AI translation services.